Everyone/No One Is Entitled?

Over at least a decade, there’s been debate about entitlements and about a younger generation that may or may not feel “entitled.” Almost always, the use of the phrase is derogatory and suggests individuals or groups who feel they deserve something without paying for it. Although the actual meaning of the word “entitled” means that someone has been given the right to receive something, Americans have a problem with those whom they believe do not deserve that right.

My problem with all the debate is that it’s not inclusive enough, that all too many groups and individuals are receiving societal/governmental benefits for which they either have not paid anything or for which they have paid a minimal amount in comparison to the value of what they have received. Now… in the United States, there are certain benefits to which law-abiding and tax-paying citizens are or should be “entitled.” We deserve fair and impartial laws and a justice system that supports them. We should have a government that protects us from attack by other countries and by terrorists or by law-breakers within our own society. We have decided as a society that part of the role of government is to support highway systems and air transport systems that benefit us all, and to regulate businesses and organizations so that we all have clean air, safe food, and various safe products. For these and other services we pay taxes.

The entitlement problem comes when people are perceived to receive services and benefits out of proportion to what they have paid. When people receive welfare benefits of various sorts for long periods of time, with some families receiving them for generations, people get angry, even though statistics show that most welfare recipients don’t receive benefits for nearly that long.

Likewise, often business owners or professionals in a field get angry when younger people express the idea that they are “entitled” to a job, especially a particular position, even when they don’t have the requisite education and/or experience.

Those are the well-known examples of “undeserved entitlement,” but what about those that aren’t so well known? For example, isn’t the corporation that receives the overall services, legal system, and national market provided by the government, but which pays no taxes on billions of dollars of income, receiving an undeserved entitlement? Or the Bundy family, which is supposed to pay $1.70 per cow and calf for federal grazing rights [a fee less than a tenth of that charged on private land], yet hasn’t paid any of those fees for almost a decade and claims that the land belongs to them through what amounts to squatters’ rights? What about a company that “bargains” for tax breaks from states when relocating a new facility [which effectively places more of the burden for state services on other taxpayers]? Are oil companies and others investing in oil and gas development entitled to a “depletion allowance,” which can reduce taxable income by as much as fifteen percent, simply because it’s possible they might run out of oil and gas to extract? Why are homeowners entitled to deduct their mortgage costs from their taxable income [perhaps as a subsidy to the construction industry?], but renters can’t deduct their rent payments? Then there are the unnecessary military bases that the Defense Department can’t close because senators and representatives insist their constituents are entitled to the remaining jobs at those facilities – which means the rest of us end up paying for those entitled jobs.

So… when people start complaining about entitlements, perhaps they should consider how many they enjoy that they haven’t considered. But then, those are always the exceptions that are deserved.

On the topic of depletion allowance: done right, a depletion allowance is just a way to allocate the costs of production over the life of the production. Over the life of the asset (oil field, tree stand, etc) it would generate the same amount of total taxes in an even and predictable way which is tax neutral and perhaps even to the public good. Of course – this assumes it is “done right” and of proportions that match the actual use. For Tax Purposes, they have an accelerated method that allows them to deduct more than their total costs over the life of the asset. Is this the method you are referring to as an entitlement?

On the topic of a business being excused from income tax I am unclear how it is a form of entitlement? There is a theory that when businesses are taxed, it is really a form of double taxation. Under the current structure, profits of business are taxed, and when the residual profits (dividends, payments, etc) ultimately get returned to the owners, the residuals are taxed once again as individual taxes. In effect, the profits are taxed twice – which in a situation where all domestic business was owned domestically, it would seem to be hugely inefficient and costly. Of course, business ownership crosses boundaries but a reduction of business taxes increases residual profits returned to the business owners, which then is taxed (at a different rate). I am not sure how this is an entitlement? It is certainly complex, convoluted, and inefficient but is it an entitlement?

A depletion allowance is a percentage deducted from gross income derived from a producing oil well, based on the idea that the asset base is “depleted” by extraction. For comparative purposes, that would be the same as allowing me to deduct a percentage of my writing income because my basic asset, i.e., my lifespan, has been depleted.

As for business taxes, the “double taxation” argument has a few flaws. First, as we all should know, tax breaks are not uniform, but vary from industry to industry and even within industries. That means that some businesses are more or less “entitled” to tax breaks. Why some and not others? Because Congress, based on political motivations, made those arbitrary decisions. Second, if the business pays no taxes, then there is no double taxation. Third, only a very small percentage of business income these days actually gets returned to the shareholders,since only fifty-four percent of businesses with a worth of over $100 million actually pay dividends, and at times over the past two decades that percentage has been below forty percent, while less than 30% of smaller companies paid dividends. So far, for example, neither Amazon nor Google nor Facebook has ever paid a dividend. Nor has Warren Buffet’s Berkshire Hathaway. Microsoft did not pay a dividend until 2013. Also, as noted in a New York Timesarticle in 2013,”Investors were more interested in possible capital gains, and executives preferred share repurchases, which could raise the share price and make their stock options more valuable,” which strongly suggests that, among other things repayments to stockholders are not exactly the highest priority, and if there is no repayment, there is no income and no double taxation of that income.

Finally, if a business does not pay taxes, regardless of reasons, but receives government services, and is recognized legally as a “person,” which corporations are, it receives government services for which it, as an entity, regardless of how its owners have or have not been taxed, has not paid. That is an undeserved entitlement.

Thank you for clarifying with such a high level of detailed support, especially on the double taxation point.

As I am still uncertain on the point of depletion allowance as an entitlement, I wonder if I am using an incorrect understanding of the term. As I understand it, a depletion allowance is just a special form of depreciation. The depletion allowance is used to spread out the capital cost of the rights to the oil or timber in the same way that depreciation is used to spread out the cost of a new factory or other long term asset. I think I could understand viewing depreciation in general as being some form of entitlement (or financial chicanery at best) but not the special focus on depletion allowance.

I certainly can see your point about the inequities in being able to “deplete” a life for tax purposes, but I don’t see the cases as being strictly parallel. We don’t pay for our lives, it is the first gift our parents give us and no money changes hands. In the case of depletion allowance, businesses must purchase the right to harvest timber or extract oil and also sometimes the land itself with real money (or value in kind) and there is some estimate of the reserves that are being purchased. I can see claiming depletion above and beyond the original purchase cost (which is common) as a form of entitlement but not up until that point. Perhaps I have drunk too much of the GAAP Kool-Aid.

If you don’t think that human life is an asset, then you need to review some basic economics. For most of human history, human effort was the biggest component of and cost of producing and selling goods. Even in the most highly automated industries, human input is necessary and invaluable. Also, life isn’t just a gift. It’s bought by the parents, particularly the mother, and has historically arrived usually with extreme pain and discomfort. Until the advent of modern medicine, death in childbirth was the single largest cause of death for women. Then the parents raise and educate that child, hardly an inexpensive or time-free process. When that is finished, business hires the individual, although business has contributed little at all, except possibly some fraction of property taxes going to local primary or secondary education, and tries to maximize that employee’s talents, while also being able to deduct wages as a cost of doing business.

Part of the problem with U.S. corporate tax structure is that the U.S. is an outlier in terms of its taxation. Most countries only tax income generated within their territorial boundaries. The U.S. insists that all corporate earnings are taxable by the federal government, at least once they’re repatriated to the U.S. This means that a significant number of multinational corporations leave foreign profits with their foreign operations and subsidiaries. It also means that U.S.companies, if they repatriate earnings and profits, end up paying both foreign and U.S. taxes, although the amount of foreign tax paid can be deducted from the U.S. tax liability. Add to that the fact that, unless a company is one that Congress has granted special exemptions to, the U.S. statutory corporate tax rate is the highest in the industrialized world. Where a company’s working headquarters is located is also a major factor, under U.S. law, in determining which country receives the bulk of its taxes. That’s why a number of recent mergers have been structured so that the foreign company merging with a U.S. company is the acquiring company, allowing an “inversion”… with lower taxes and those being paid to another country. This is, of course, a great simplification of a complicated tax code, but it’s basically accurate.